Wobbly financial times coming?

It may seem irrelevant financial esoterica but it’s not. The yield curve is acting strangely and interbank swap rates are widening.  These can be signals that Big Money is getting seriously nervous about what’s coming down the road.

The yield curve is the difference in interest paid for the various lengths of US government Treasury securities. When it starts getting hiccups, then, well, some hedge fund somewhere (or maybe several of them) might explode because they were betting the wrong way, something which can create further carnage, as they are forced to liquidate which in turn can cause other entities in the house of cards called international finance to crumble too. More importantly though, the yield curve influences interest rate paid by consumers and businesses. So, it’s not really irrelevant at all.

Swap rates are the rates that banks charge each other for short-term loans. When they widen, banks are getting nervous. A number of such interest rate indicators are becoming problematic.

“Money markets continued to show clear signs of extreme stress” said Bank for International Settlements in their quarterly report.

Is your variable rate mortgage pegged to LIBOR? It might well be. And most people with such mortgages probably don’t even know what LIBOR is.

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